February 18th, 2012
06:24 PM ET

Obama's recovery?

Editor's Note: Jeffrey Frankel is Professor of Capital Formation and Growth at Harvard University. For more from Frankel, visit Project Syndicate or follow it on Facebook and Twitter.

By Jeffrey Frankel, Project Syndicate

With November’s election in the United States fast approaching, the Republican candidates seeking to challenge President Barack Obama claim that his policies have done nothing to support recovery from the recession that he inherited in January 2009. If anything, they claim, his fiscal stimulus, the bank bailouts, and US Federal Reserve Chairman Ben Bernanke’s aggressive monetary policy made matters worse.

Obama’s Democratic defenders counter that his policies staved off a second Great Depression, and that the US economy has been steadily working its way out of a deep hole ever since. Middle-ground observers, meanwhile, typically conclude that one cannot settle the debate, because one cannot know what would have happened otherwise.

There is a good case to be made that government policies – while not strong enough to return the economy rapidly to health – did halt an accelerating economic decline. But the middle-ground observers are right that one cannot prove what would have happened otherwise. It is also true that it is rare for a government’s policies to have a major impact on the economy immediately.

But here is the remarkable thing: whether one listens to the Republicans, the Democrats, or the middle-ground observers, one gets the impression that economic statistics show no discernible improvement around the time that Obama took office. In fact, the reality could hardly be more different.

This is especially true if one looks at revised data, which show the US economy to have been in far worse shape in January 2009 than was reported at the time. In January 2009, the annualized growth rate in the second half of 2008 was officially estimated to have been -2.2%; but current figures reveal the contraction to have been much sharper – a horrendous -6.3%. This is the main reason why economic activity in 2009 and 2010 was so much lower than had been forecast – and why unemployment was so much higher.

The maximum rate of economic contraction – a veritable freefall – came in thelast quarter of 2008. More specifically, according to the monthly GDP estimates from the highly respected forecaster Macroeconomic Advisers, it came in December – the month before Obama was inaugurated. As the graphs below plainly show, the growth trajectory miraculously reversed as soon as Obama’s term began, yielding a clear “V” pattern in 2008-09.

The full force of the fiscal stimulus package began to go into effect in the second quarter of 2009, with the US National Bureau of Economic Research officially designating the end of the recession as having come in June of that year. Real GDP growth turned positive in the third quarter, but slowed again in late 2010 and early 2011, which coincides with the beginning of the withdrawal of the Obama administration’s fiscal stimulus.

Other economic indicators, such as interest-rate spreads and the rate of job loss, also turned around in early 2009. Labor-market recovery normally lags behind that of GDP – hence the “jobless recoveries” of recent decades. But official data on monthly job losses and gains reveal an obvious V-shape here, too: as the graph below shows, the end of the free-fall for private-sector employment came precisely when Obama was inaugurated.

Again, such data do not demonstrate that Obama’s policies yielded an immediate payoff. In addition to the lags in policies’ effects, many other factors influence the economy every month, making it difficult to disentangle the true causes underlying particular outcomes.

Given that difficulty, the right way to assess whether the fiscal stimulus enacted in January 2009 had a positive impact is to start with common sense. When the government spends $800 billion on such things as highway construction, salaries for teachers and policemen who were about to be laid off, and so on, it has an effect. Workers who otherwise would not have a job now have one, and may spend some of their income on goods and services produced by other people, creating a multiplier effect.

Those who claim that this spending does not boost income and employment (or that it causes harm) apparently believe that as soon as a teacher is laid off, a new job is created somewhere else in the economy, or even that the same teacher finds a new job right away. Neither can be true, not with unemployment so high and the average spell of unemployment much longer than usual.

They also believe that the government deficit drives up inflation and interest rates, thereby crowding out other spending by consumers and firms. But interest rates are at rock-bottom levels – even lower than in January 2009 – while core inflation has slowed to a pace unseen since the early 1960’s. The conditions of the last four years – high unemployment, depressed output, low inflation, and low interest rates – are precisely those for which traditional “Keynesian” remedies were designed.

Economists’ more sophisticated forecasting models also show that the fiscal stimulus had an important positive effect, for much the same reasons as the common-sense approach. The non-partisan US Congressional Budget Office reports that the 2009 spending increase and tax cuts gave a positive boost to the economy, and indeed had the extra multiplier effects predicted by traditional Keynesian models. Allowing for a wide range of uncertainty, the CBO estimates that the stimulus added 1.5-3.5% to GDP by the fourth quarter, relative to where it otherwise would have been. The boost to 2010 GDP, when the peak effect of the stimulus kicked in, was roughly twice as great.

Of course, econometric models do not much interest most of the public. A turnaround needs to be visible to the naked eye to impress voters. Given this, one can only wonder why basic charts, such as the 2008-2009 “V” shape in growth and employment, have not been used – and reused – to make the case.



The views expressed in this article are solely those of Jeffrey Frankel.

Post by:
Topics: Economy • President Obama

soundoff (21 Responses)
  1. George Patton

    Since Ron Paul won't be nominated, that means that no matter who wins the election next November, be it Obama, Romney or Santorum, the MIC(Military-industrial-complex) wins bigtime as it tightens it's stranglehold on both this country and Europe as well. How ominous this bodes!!!

    February 18, 2012 at 7:12 pm | Reply
    • Rz

      Bingo! When Bush junior took office, the US was hit by a terrorist bombshell. When Obama took office, the US was hit by an economic bombshell. And no matter what, it seems the only options ever available to resolve a US crisis is to either finance big "War" or finance a big "Banks".

      The fact of the matter is that the US Gov cannot reduce or eliminate the MIC. It has to stay intact and you're gonna have to feed it no matter what. Without it, the USA would come to an end as we know it. So the best solution is to strike a compromise. Bring home the labour of the war machine to work on fixing up America and have the MIC build affordable products for the American public (instead of wasting hundreds of billions on other countries that offer no real return on investment).

      It's a win, win, win, win situation. The military defense stays intact, the MIC stays intact, and the taxpayers all get free Stealth-mobiles, Milstar iPads, whatever, and religious sects around the world consume each other, and China goes back to growing rice.

      Almost sounds too good to be true.

      February 18, 2012 at 8:44 pm | Reply
      • j. von hettlingen

        The U.S. is militarily THE superpower and wants to maintain the status quo. The defense budget is a priority.
        The author made a point that "econometric models do not much interest most of the public. A turnaround needs to be visible to the naked eye to impress voters". It's the pocketbooks of the emotional voters that decide the outcome of the November elections.

        February 19, 2012 at 4:33 am |
      • George Patton

        @Rz. It is too good to be true since it's the MIC that's breaking the national budget. Like I said before, we sorely need to break the stranglehold that the MIC has on this country since it owns both the White House and the majority in Congress. As it is, it's countries like China and that country whose name that starts with a J that's now keeping our economy afloat by financing our huge deficit!!!

        February 19, 2012 at 11:37 am |
      • Rz

        GP & JVH,

        We're on the same page, and I would love to see the people wrestle back their government and country. But we all know that it just cannot happen, regardless of whatever puppet is put in the White House. So the next best thing is to compromise, and even that is iffy, but may be possible to at least some degree.

        February 19, 2012 at 2:18 pm |
  2. John

    Obama-nomics 101

    How did the unemployment rate fall in 2012? By using "Obamanomics". The theory of "Obamanomics" does not concern it's self with actually creating real jobs. It simply reduces the unemployment rate by defining away the problem. Lets take a simple example to illustrate how this works. Then we will use real life numbers. Assume you have a population of 100 people with only 70 jobs. That is a 30% unemployment rate. Using "Obamanomics" you subtract 5 people from the total population of 100 giving you a new population of 95. Now only 25 people are unemployed. 25 unemployed / 95 total equals a lower unemployment rate of 26.3%. This allows the Government to claim that their economic policies have worked. Nevermind that no new jobs have been created.

    Now for the real numbers. In January 1.2 million people left the work force. This is largely because they became so discouraged in their job search they stopped looking for work. In fact, since January 2009, the Bureau of Labor and Statistics says more than five million people have dropped out of the labor force–the greatest decline in American history and the lowest participation rate in more than three decades. Only about 6 in 10 adult American civilians are counted as part of the labor force.

    Obamanomics is all about smoke, mirrors and getting reelected. It has nothing to do with actual job creation.

    February 18, 2012 at 9:51 pm | Reply
    • Gavin

      Yes, some economists use this statistical trick, which isn't really a trick since if you've ever read a NY times article you will see it is always mentioned. It's difficult to factor this out, so most unemployment reports leave it in. In this sense, you are right to ignore official unemployment numbers, although the term "Obamanomics" is a little unfair, since Obama does not exactly go out and tell people to report numbers this way.

      But your second paragraph misses the point. You seem to use a drop in people looking for work ("1.2 million people left the work force" due to "they became so discouraged in their job search they stopped looking for work"), a completely true statement, to support the idea that we have not actually been creating jobs, which is completely wrong.

      The "real numbers" are this: 243,000 jobs were added in January. In fact, we have been adding jobs for over a year, if you discount August which had a net gain of basically zero. The number of jobs added per month has often been in the hundreds of thousands range.

      It is totally unfair to blame Obama for mishandling an economy which is getting better as we speak.

      February 18, 2012 at 11:48 pm | Reply
      • Will Hayes

        It is not at all unfair to blame President Obama for a terrible economy that is getting better slowly and only in certain areas. The economy is cyclical and we should be in a period of strong growth right now. We are not. The left tends to pretend that the stimulus acted in a vacuum, and the onorous taxes and regulations imposed to 'pay for' a stimulus we will be paying interest on forever. Kenynes never recommended that we pay for a stimulus with debt that we have no plans to pay off. A stimulus must be relative. Far left economists give the stimulus an ROI of about two. Even if that were true, the roi on private venture capital investment is historically above six. So, if the private economy was not hamstrung by new regulations, taxes, and legal concerns, including the capricious nature of our fiat president, the private sector could have put more money to work much more efficiently and created far more jobs. Comparative job creation is the key. Let's look at Reagan's tax cut, private sector recovery, from a worse recession, in comparison.

        March 13, 2012 at 7:08 pm |
  3. S.V.P.YADAV

    If Mr.Obama Garu failed in external affairs with like Iran and Syria and china, Russia and internally he must change his policies,and must follow democratic rules in the country and abroad.otherwise he is in hell.

    February 19, 2012 at 3:18 am | Reply
  4. matt a.

    As long as politicians and economists treat this as a recession and not a depression, these charts are irrelevant–which they are under any condition.

    Until the mass deleveraging occurs. . . .

    February 19, 2012 at 7:59 am | Reply
  5. concerned citizen

    It is sad and worrying to live in a world where facts are ignored or disputed and unsubstantiated opinion prevails. I am encouraged by the information presented in this article. It seems to support Keynes understanding of the dynamics of the economy and the need for short term stimulus in times of economic crisis. Yes, we also need to get our fiscal house in order, but with careful consideration of the lessons of the 1930s that imprudent and badly timed fiscal tightening can and will cause lasting damage to a recovery.

    February 19, 2012 at 10:24 am | Reply
    • Will Hayes

      There was no fiscal tightening in the thirties and there has been none now. We raised taxes, regulations, gave unions more power and started a trade war in the thirties. Sound familiar?

      March 13, 2012 at 7:15 pm | Reply
  6. @AgoristDon

    It's not a recovery, it's more meddling to prevent a recovery from happening. It's the New Deal all over again.

    The Great Depression of 1920?? – Yes, the one they don't talk about.

    http://tirelessagorist.blogspot.com/2012/02/great-depression-of-1920.html

    February 19, 2012 at 11:13 am | Reply
    • George Patton

      The main reason that they don't talk much about the depression of 1920 is because it was of very short duration(1920-1921). After that, the economy shot up to unprecedented levels as never seen before nor after. On the other hand, Europe spent years lavishing in their great post-war depression, except in places like Italy, Germany and Russia. In fact, Mussolini and the Fascists did save Italy from Communism in the early 1920's as they restored Italy to it's former prosperity.

      February 19, 2012 at 5:16 pm | Reply
  7. RugbyGuy60

    V for victory.

    February 19, 2012 at 11:54 pm | Reply
  8. P. Busch

    I'd like to hear all the candidates, Republicans and the President, address the data contained in the January 13, 2012 report from the Congressional Budget Office on Fiscal Year 2012 spending. The Unauthorized Appropriations and Expiring Authorizations, an annual report, shows expired and expiring authorizations of federal funds that exist in FY2012, the current fiscal period. See URL: http://www.cbo.gov/publication/42858.

    It was a real eye-opener to realize that so many programs and activities (grants, research, etc.), dating back to the 1980s, are still being funded so generously or in amounts "not available." Certainly the President's Budget for Fiscal Year 2013 must justify continuing to funnel our taxpayer dollars to past national priorities while he and Congress are generating new ones? And the Republican candidates should be very specific in their campaigns on national programs that no longer make sense to continue.

    Speaking for potential, active and retired federal employees, Congress must stop freezing wages and attacking retirement benefits to generate "savings" in order to reduce the federal deficit. Apparently, it's "politically appropriate" to target this community of workers who are simply government workers carrying out our country's operations.

    Seems there is ample room to "just say no" to spending precious tax dollars on "yesterday's causes."

    March 2, 2012 at 7:51 pm | Reply
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